Financial Distress and the Business Cycle
AbstractIn this paper we argue that firms' financial distress should play a greater role in the macroeconomic analysis of the business cycle. We provide a nontechnical account of a general equilibrium model that exhibits financially-driven equilibrium cycles. We show that the empirical evidence is widely supportive of the key hypothesis and implications of our approach. We use the model in order to evaluate the effects of several policy measures. It turns out that deepening the market for second-hand capital goods, subsidizing the interest payments of companies which start up when financial conditions are tight, and bailing out some companies in default can indeed "stabilize" the economy. By way of generalization, we may say that the policy reaction to a financially driven bust should be accommodating. Copyright 1999 by Oxford University Press.
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Bibliographic InfoArticle provided by Oxford University Press in its journal Oxford Review of Economic Policy.
Volume (Year): 15 (1999)
Issue (Month): 3 (Autumn)
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- Claudio Borio, 2011.
"Rediscovering the macroeconomic roots of financial stability policy: journey, challenges and a way forward,"
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- Claudio Borio, 2011. "Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 87-117, December.
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- Claudio Borio & Mathias Drehmann, 2011. "Toward an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 4, pages 063-123 Central Bank of Chile.
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